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MSPs Face a Fight over Service Sales Tax

State tax auditors have set their sights on the business and professional services offered by managed service providers, sparking what will be "a long, hard-fought campaign to educate tax auditors," according to MSPAlliance. By Martin Sinderman

State governments needing new tax revenues to plug holes in beleaguered budgets are setting their sights on sales tax levied on business and professional services such as accounting, law, and healthcare. And in a number of instances, managed services providers are also in the crosshairs.

MSPs are increasingly getting flack from state tax auditors, “who often don’t understand the intricacies of being a managed services provider,” says Charles Weaver, president of the industry association MSPAlliance.

The MSP world, filled with IT-specific terms and concepts such as cloud computing, hardware as a service (HaaS), and software as a service (SaaS), can be pretty confusing for auditors. The situation is exacerbated by the fact that these and other elements of a changing MSP business blur the distinction between services and goods in the first place.

For example, simply selling a piece of hardware to a client has traditionally resulted in a taxable sale.

“But where it gets tricky is if the MSP provides ongoing management and maintenance not on the device per se, but the data on it,” explains Weaver. This has been considered a professional service in the past and has not been taxed. “But now you have auditors who look at an invoice for a piece of hardware and see what looks like a one-year maintenance agreement, and say you have to pay sales tax on that whole year of revenue.”

The issue of taxation of MSP services came to the fore recently when an MSPAlliance member successfully fought an assessment by the Florida Department of Revenue, Weaver reports. That kicked off “what is going to be a long, hard-fought campaign to educate tax auditors at the state level on what MSPs actually do for a living.”

This is part of a larger battle taking place in state capitals across the nation regarding taxation of elements of the IT industry. The stakes are high for states seeking to land new IT businesses, according to Su Hawk, president of CSIA, Colorado’s Technology Association, which recently fought state legislation expanding sales tax on software.

“Now, if you employ people and use software in the state of Colorado, you pay more in taxes, which makes us less competitive with the majority of other states,” says Hawk.

“Public-policy-wise, it’s really foolish to start taxing IT and IT services, the one sector that is actually thriving in this economy,” adds Weaver. And given the role MSPs play in safeguarding SMB IT infrastructure, “it seems especially foolish to start taxing their services.”

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Get an edge on the competition

With each issue packed full of powerful news, reviews, analysis, and advice targeting IT channel professionals, ChannelPro-SMB will help you cultivate your SMB customers and run your business more profitably.